Inglis v. Federal Commissioner of Taxation.
Members:Sheppard J
Tribunal:
Supreme Court of New South Wales
Sheppard J.: To be dealt with are four appeals brought by the appellant Kathleen Isabel Inglis against the disallowance by the Commissioner of Taxation of objections to assessments of income tax. Two of the appeals are brought by the appellant in her personal capacity and two in her capacity as executrix of the will of her husband, William Carmichael Inglis who died on 27th September, 1975. Although the objections, strictly speaking, relate to the personal returns of Mrs. Inglis and her husband, the real objection is to the disallowance by the Commissioner of deductions claimed pursuant to sec. 51 of the Income Tax Assessment Act, 1936, as amended, in connection with a partnership business said to have been carried on by the Inglis' during the years of income in question, namely, those ending 30th June, 1974, and 30th June, 1975. Accordingly it is to the partnership return for each of those years that regard should be had.
There is no doubt that the Inglis' acquired in or about the year 1950, a property situated in Tasmania not far from Hobart known as `Lammermuir'. The property was a pastoral one and comprised some 1,300 acres of land or a little more. They entered into a partnership agreement on 23rd April, 1951 and thereafter for many years lived on the property and worked it as a pastoral or grazing enterprise. Returns of income lodged by them since 1951 have been tendered and these show, and there is no contest about it, that there were numbers of sheep and later cattle upon the property. In
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the 1960's, there were at times as many as 1,000 sheep and when a decision was taken to give up sheep and go into cattle there were at times as many as 50 cattle, that is to say, beef cattle, upon the property.The Inglis' were treated by the Commissioner during those years as carrying on a grazing business and deductions were allowed from their assessable income on that basis. The Commissioner continued to take that view until the year ending 30th June, 1973, when he disallowed certain deductions upon the basis that the business was no longer being carried on.
It would appear that some time during the 1960's Mr. Inglis obtained employment in Hobart so that the income which he had from the property was supplemented by his earnings in that employment.
In the 1960's the Inglis' became involved in a dispute with the Commonwealth Trading Bank which held a mortgage over the property. That dispute and certain other matters to which I need not refer eventually led to protracted litigation between the Inglis' and the bank and other parties. Litigation took place not only in the High Court of Australia, where what might be called the principal action was tried by Mason J., but also in the Supreme Court of the Australian Capital Territory and in the Supreme Court of Tasmania. According to Mrs. Inglis' evidence it was because of the demands which the litigation was making upon herself and her husband that eventually both parties went to reside in Melbourne away from the property and later to Canberra. Both had employment, firstly in Melbourne and then in Canberra where Mrs. Inglis is still employed.
The returns of income which have been lodged show that there were no animals belonging to the Inglis' upon the property after 30th June, 1970. In the return for the year of income ending 30th June, 1970, there is a reference to the fact that 24 sheep had either died or been lost. No other animals are referred to as being upon the property and the 24 dead or missing sheep appear to have been the last animals belonging to the Inglis' which were on the property at least until a point of time after the expiration of the second of the years of income here in question.
The deductions which have been claimed by the taxpayers and disallowed by the Commissioner in respect of the 1974 year comprise certain travelling expenses and printing and stationery expenses said to have been incurred in relation to carrying on a business upon the property. Those deductions disallowed in respect of the later year of income include a deduction for interest on borrowed money, a deduction for rates paid to the local council, a deduction for depreciation of plant and machinery, travelling expenses incurred in travelling not only to Hobart but also to Sydney, deductions for certain telephone and telegraphic expenses and deductions for certain legal expenses and expenses associated with attempts to obtain finance in respect of the property so that, as I understand it, the bank could be paid out. It is unnecessary for me at the moment to be more specific as to the nature of these deductions.
The issue which developed between the parties and which is the substantial issue which I must consider is whether or not it is correct to say that in the relevant years the appellant and her husband were carrying on a business upon the property. The deductions, as I have said, are claimed pursuant to the provisions of sec. 51(1) of the Act, which provides:
``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''
It is the Commissioner's case that the appellant has failed to bring herself within either the first or bring herself within either the first or the second limb of that sub-section. It would seem to me that if the appellant has a case it must be based, notwithstanding submissions by her to the contrary, upon the second limb of that section so that she must show in order to be successful that in the relevant years there was being carried on on the property a business. It is perfectly true, of course, that a business may be being carried on and yet no income whatsoever may be earned from it in a particular year, and it is also true that
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expenditure incurred at a point of time after it may be said that the business has ceased to be carried on may sometimes be deducted in later years if it relates to the carrying on of the business in prior years. In the present case, however, the expenditure which is the subject of the claim in both years is what might be termed current expenditure. In other words, it was expenditure not only incurred in the income years 1974 and 1975, but incurred in those years in respect of whatever it was that was then going on on the property. It seems to me, therefore, that it is incumbent upon the appellant who bears the onus of proof to establish upon a balance of probabilities that she and her husband were carrying on a business on the property in the relevant tax years. That is the issue to which I direct myself.It is not suggested by Mrs. Inglis in her evidence that there were any pastoral, grazing or agricultural activities being carried on on the property by her or by her husband in the relevant years. That is not her case. She does point to the fact that at times there were certain animals, certain stock upon the property, but no payment was received by the Inglis' for these and the stock belonged to neighbouring farmers. Her case is that a business was in fact carried on upon the property at least up to the end of the income year ending 30th June, 1972, that she and her husband maintained the intention, which they never forsook, of carrying on that business, but were forced, because of the circumstances to which I have already referred, to leave the property and for a time to leave it unstocked, always intending to come back and carry on the business as they had done in the past. In fact, according to Mrs. Inglis' evidence, she has in the income year ending 30th June, 1976, commenced to run some stock on the property once more. That of course is a year with which I am not concerned, but I do take into account the fact that there are some stock although not great in quantity on the property at the moment and that there have been thereon such stock since a point of time in the year of income ending 30th June, 1976.
The business which is alleged to have been carried on on the property in the relevant years must be in reality a primary producing business, really, a grazing or pastoral business. It is not suggested that at any time crops were grown on the property. It would seem to me that a land owner, such as the Inglis' here, might for various reasons decide that it was sensible in the light of the then present circumstances not for a time to carry stock or to indulge in any activity which might bring in income. This might be because the cost of carrying on the activity which would result in income being earned would outweigh by far the advantage of earning the income. Without expressing any final view on the matter, I suppose such a situation, if it were brought about by drought or market considerations or perhaps some other factors, might continue for a period in excess of an income year. As I say I do not express any final opinion on that matter.
In the present case, however, I am satisfied by the evidence which has been given that pastoral activities and thus all primary producing activities ceased on this property about the beginning of the income year ending 30th June, 1970. In other words by the end of the calendar year 1969 all pastoral and thus primary producing activities on this property had ceased. It seems to me that I should accept Mrs. Inglis' evidence to the extent that she and her husband had some intention at some time in the future when perhaps things improved for them, or at least their minds were not diverted by the litigation in which they were engaged, of eventually returning to the property and recommencing their operations. But although they may have had that intention, it seems to me that the facts here point unmistakably to the situation that really by the end of 1969, all pastoral activities having ceased, no business was in fact being carried on upon the land.
Mrs. Inglis has relied strongly upon the fact that she and her husband had the intention to which I have referred, but I do not regard that, in the light of the facts of this case and the long period, some three years before the commencement of the 1974 income tax year, during which there was no activity, as being sufficient to show that there was continuously, as Mrs. Inglis submits, carried on on this property the pastoral business which she said in her evidence and submissions has never ceased. I am therefore of the opinion that Mrs. Inglis has failed to establish what it was necessary for her to establish to be successful in this case, namely, the existence of a business in the relevant tax years.
That is sufficient to dispose of these appeals, but I should say something specifically about some of the expenditure which was incurred
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by Mrs. Inglis and her husband in the income tax year ending 30th June, 1975. That, as I have said, related in part to the legal expenses and to procuration and other fees paid to financiers in the hope apparently of obtaining finance with which the bank might be paid out. It would seem to me from the evidence that was given that much of this expenditure was of a capital and not a revenue nature in any event. However, I express no final view on that matter because it is unnecessary to do so in the light of the decision to which I have come. Furthermore, I express no view upon the operation, in the circumstances of this case, of sec. 67 and 67A of the Act upon which Mrs. Inglis also relied. I should say, however, that much of the expenditure on legal costs seems to have been incurred in relation to attendances in the various courts in which the Inglis' were engaged in the litigation which I have mentioned. I would have thought if this were so, on no basis could that expenditure be the subject of a deduction. Some of the travelling expenses for the 1975 year fall into the same category.In the result I am of the opinion that each of these appeals should be dismissed and that is the order which I make.
- (Mr. Denton asked for costs. Mrs. Inglis submitted that his Honour should not order costs against her.)
I am afraid there are certain principles upon which I must exercise my discretion and I think it is a case where I am bound, if Mr. Denton asks for them, to order the appellant to pay the costs of the appeals. Accordingly, I order the appellant to pay the Commissioner's costs of each of the appeals. The exhibits may be returned.
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